Fitch Affirms Coventry Building Society's Mortgage Covered Bonds at 'AAA'; Outlook Stable

Mon Jun 30, 2014 11:34am EDT

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(The following statement was released by the rating agency) LONDON, June 30 (Fitch) Fitch Ratings has affirmed Coventry Building Society's (CBS, A/Stable/F1) GBP3.2bn mortgages covered bonds at 'AAA' with a Stable Outlook. KEY RATING DRIVERS The covered bond rating is based on CBS's Long-term Issuer Default Rating (IDR) of 'A', an IDR uplift of 0, an unchanged Discontinuity Cap (D-Cap) of 4 (moderate risk) and the 78.4% asset percentage (AP) that Fitch takes into account in its analysis. The Stable Outlook reflects that on CBS's IDR. The 'AAA' breakeven AP improved to 87% from 85.8%. It is largely driven by refinancing and reinvestment costs and, to a lesser extent, expected credit loss. The unstressed weighted average life (WAL) of the assets was 10.7 years, far longer than the WAL of 2.2 years of the covered bonds outstanding. The 'AAA' breakeven AP is less conservative than the 85.8% calculated in 2013 due to the use of lower refinancing spread. The 'AAA' credit loss was largely similar to 2013's due to a fairly stable pool composition. The unchanged D-Cap of 4 is driven by liquidity gap & systemic risk and systemic alternative management, which Fitch assesses as moderate. The programme has a reserve fund, which covers a three-month interest and senior fees, and the five outstanding covered bonds all have a 12-month extendable maturity. Fitch takes into account the contractual AP used in the asset coverage test at 78.4%, which supports a 'AA+' rating on the covered bonds on a probability of default basis. The contractual AP is sufficient to achieve recoveries in excess of 91% should the covered bonds default, which support the covered bonds' rating at 'AAA'. RATING SENSITIVITIES The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR of CBS is downgraded by two or more notches to 'BBB+' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 2 or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 87%. The Fitch breakeven AP for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time. More details on the portfolio and Fitch's analysis will be available in a full rating report, which will shortly be available at Contact: Primary Analyst Kate Lin Director +44 20 3530 1706 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Jan Seemann Director +49 69 7680 76112 Committee Chairperson Cosme de Montpellier Senior Director +44 20 3530 1407 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available at Applicable criteria: 'Covered Bonds Rating Criteria', dated 10 March 2014; 'Counterparty Criteria for Structured Finance and Covered Bonds' and 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', both dated 14 May 2014; 'EMEA RMBS Master Rating Criteria', dated 28 May 2014; 'Criteria Addendum - UK Mortgage Loss and Cash Flow Assumptions', dated 30 May 2014 and 'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds', dated 23 January 2014, all available at Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here EMEA RMBS Master Rating Criteria here Criteria Addendum: UK - Residential Mortgage Loss and Cash Flow Assumptions here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.